MODULE 12:

IMPLICATIONS OF
GOODS AND SERVICES
TAX ON INDIA’S
FOREIGN TRADE
LEARNING OBJECTIVES:

• To understand the concept of Good and Services Tax in India

• To understand the need for implementation of GST.
• To explain the design of Goods & Services Tax in India.
LEARNING MATERIAL:

12.1 INTRODUCTION: Whether it was uniformity of taxation and consequent free interior trade or
possession of ‘the jewel in the crown’ at the root of prosperity of Britain is debatable, nonetheless the
words of father of modern economics on the benefits of uniformity of system of taxation cannot be
taken too lightly. Before implementation of Goods and Service Tax (GST), Indian taxation system
was a farrago of central, state and local area levies. By subsuming more than a score of taxes under
GST, road to a harmonized system of indirect tax has been paved making India an economic union.

12.2 NEED FOR GST IN INDIA: The introduction of CENVAT removed to a great extent
cascading burden by expanding the coverage of credit for all inputs, including capital goods.
CENVAT scheme later also allowed credit of services and the basket of inputs, capital goods and
input services could be used for payment of both central excise duty and service tax. Similarly, the
introduction of VAT in the States has removed the cascading effect by giving set-off for tax paid on
inputs as well as tax paid on previous purchases and has again been an improvement over the previous
sales tax regime.

But both the CENVAT and the State VAT have certain incompleteness. The incompleteness in
CENVAT is that it has yet not been extended to include chain of value addition in the distributive
trade below the stage of production. Similarly, in the State-level VAT, CENVAT load on the goods
has not yet been removed and the cascading effect of that part of tax burden has remained unrelieved.
Moreover, there are several taxes in the States, such as, Luxury Tax, Entertainment Tax, etc. which
have still not been subsumed in the VAT. Further, there has also not been any integration of VAT on
goods with tax on services at the State level with removal of cascading effect of service tax. CST was
another source of distortion in terms of its cascading nature. It was also against one of the basic
principles of consumption taxes that tax should accrue to the jurisdiction where consumption takes
place. Despite remarkable harmonization in VAT regimes under the auspices of the EC, the national
market was fragmented with too many obstacles in free movement of goods necessitated by
procedural requirement under VAT and CST.

12.3 THE DESIGN OF INDIAN GST:Concurrent dual model of GST: India has adopted dual GST
model because of its unique federal nature. Under this model, tax is levied concurrently by the Centre
as well as the States on a common base, i.e. supply of goods or services or both. GST to be levied by
the Centre would be called Central GST (Central tax / CGST) and that to be levied by the States
would be called State GST (State Tax / SGST). State GST (State Tax / SGST) would be called
UTGST (Union territory tax) in Union Territories without legislature. CGST & SGST / UTGST shall
be 29 | 46 levied on all taxable intra-State supplies.

The IGST Model: Inter-State supply of goods or services shall be subjected to integrated GST
(Integrated tax / IGST). The IGST model is a unique contribution of India in the field of VAT. The
IGST Model envisages that Centrewould levy IGST (Integrated Goods and Service Tax) which would
be CGST plus SGST on all inter-State supply of goods or services or both. The inter-State supplier
will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his
purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of
IGST. The person based in the destination State will claim credit of IGST while discharging his
output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST
used in payment of SGST. The relevant information will also be submitted to the Central Agency
which will act as a clearing house mechanism, verify the claims and inform the respective
governments to transfer the funds. The major advantages of IGST Model are:
(i) Maintenance of uninterrupted ITC chain on inter-State transactions.
(ii) No upfront payment of tax or substantial blockage of funds for the interState supplier or
recipient.
(iii) No refund claim in exporting State, as ITC is used up while paying the tax.
(iv) Self-monitoring model.
(v) Model takes ‘Business to Business’ as well as ‘Business to Consumer’ transactions into
account. 10.3 Tax Rates: Owing to unique Indian socio-economic milieu, four rates namely
5%, 12%, 18% and 28% have been adopted. Besides, some goods and services are exempt
also. Rate for precious metals is an exception to ‘four-tax slab-rule’ and the same has been
fixed at 3%. In addition, unworked diamonds, precious stones, etc. attracts a rate of 0.25%. A
cess over the peak rate of 28% on certain specified luxury and demerit goods, like tobacco
and tobacco products, pan masala, aerated water, motor vehicles is imposed to compensate
States for any revenue loss on account of implementation of GST. The list of goods and
services in case of which reverse charge would be applicable has also been notified.

12.4 DEEMED EXPORTS AND GST: “Deemed Exports” refers to supplies of goods manufactured
in India (and not services) which are notified as deemed exports under Section 147 of the
CGST/SGST Act, 2017. The supplies do not leave India. The payment for such supplies is received
either in Indian rupees or in convertible foreign exchange. Deemed exports are not zero-rated supplies
by default, unlike the regular exports. Hence all supplies notified as supply for deemed export will be
subject to levy of taxes i.e. such supplies can be made on payment of tax and cannot be supplied under
a Bond/LUT. However, the refund of tax paid on the supply regarded as Deemed export is admissible
to either the supplier or the recipient. The application for refund has to be filed by the supplier or
recipient (subject to certain conditions) of deemed export supplies, as the case may be.

12.5 ZERO RATING OF GST IN EXPORT CHAIN: As per section 2(47) of the CGST Act, 2017,
a supply is said to be exempt, when it attracts nil rate of duty or is specifically exempted by a
notification or kept out of the purview of tax (i.e. a non-GST supply). But if a good or service is
exempted from payment of tax, it cannot be said that it is zero rated. The reason is not hard to find.
The inputs and input services which go into the making of the good or provision of service has
already suffered tax and only the final product is exempted. Moreover, when the output is exempted,
tax laws do not allow availment/ utilisation of credit on the inputs and input services used for supply
of the exempted output. Thus, in a true sense the entire supply is not zero rated. Though the output
suffers no tax, the inputs and input services have suffered tax and since availment of tax on input side
is not permitted, that becomes a cost for the supplier. The concept of zero rating of supplies aims to
correct this anomaly. What is Zero Rating? By zero rating it is meant that the entire value chain of the
supply is exempt from tax. This means that in case of zero rating, not only is the output exempt from
payment of tax, there is no bar on taking/availing credit of taxes paid on the input side for
making/providing the output supply. Such an approach would in true sense make the goods or
services zero rated. All supplies need not be zero-rated. As per the GST Law exports are meant to be
zero rated the zero-rating principle is applied in letter and spirit for exports and supplies to SEZ. The
relevant provisions are contained in Section 16(1) of the IGST Act, 2017, which states that “zero rated
supply” means any of the following supplies of goods or services or both, namely: ––

(a) export of goods or services or both; or

(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic
Zone unit. As already seen, the concept of zero rating of supplies requires the supplies as well as the
inputs or input services used in supplying the supplies to be free of GST. This is done by employing
the following means:

a) The taxes paid on the supplies which are zero rated are refunded;

b) The credit of inputs/ input services is allowed;

c) Wherever the supplies are exempted, or the supplies are made without payment of tax, the
taxes paid on the inputs or input services i.e. the unutilised input tax credit is refunded.

The provisions for the refund of unutilised input credit are contained in the explanation to Section 54
of the CGST Act, 2017, which defines refund as below: “refund” includes refund of tax paid on zero-
rated supplies of goods or services or both or on inputs or input services used in making such zero-
rated supplies, or refund of tax on the supply of goods regarded as deemed exports, or refund of
unutilised input tax credit as provided under sub-section (3). Thus, even if a supply is exempted, the
credit of input tax may be availed for making zero-rated supplies.

A registered person making zero rated supply can claim refund under either of the following options,
namely:

a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such
conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and
claim refund of unutilised input tax credit; or

b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as
may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or
services or both supplied, in accordance with the provisions of section 54 of the CGST Act, 2017 or
the rules made thereunder. As per Section 54(3) of the CGST Act, 2017, any unutilised input tax
credit in zero rated supplies can be refunded, wherever such supplies are made by using the option of
Bond/ LUT.

SUGGESTED LEARNING:

1. http://gstcouncil.gov.in
2. www.cbic.gov.in
3. www.gstindia.com
LEARNING APPLICATION:

Exercise 1: Calculate the GST for following items.

HS CODE GOODS PARTICUALRS GST RATES

6901 00 10 Bricks of fossil meals or similar
siliceous earths
9603 10 00 Broomsticks
2202 90 90 Tender coconut water put up in
unit container and bearing a
registered brand name
3307 41 00 Odoriferous preparations which
operate by burning [other than
agarbattis]
4806 40 10 Glassine papers

Review Question 2: Study theNotification No. 37/2017 – Central Tax dated 4th October 2017 and
discuss among participants the process for neutralization of Goods &service Tax on exportable goods.
REVIEW OF LEARNINGS:

• Understood the concept of Goods and Services Tax

• Understood the need for GST in India
• Understood the zero rating of GST in Foreign Trade.

REVIEW OF LEARNING: